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Sun 11 Sep 2011 07:31 AM

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The big energy shift

Iraq War has had a big part to play in triggering an investment in oil production capacity in Gulf countries

The big energy shift

The collapse of the twin towers did little to help America’s economy, but the event certainly went some way to helping those of the Gulf countries. The presence of oil - by far the GCC’s biggest export - got a significant shot in the arm as events after 9/11 played out.

Of course, it wasn’t actually 9/11 itself, but the subsequent Iraq war which sparked the change. Relieving the world of approximately 2.5 million barrels of production capacity per day, the conflict forced the GCC countries into action, and practically handed them the opportunity to finally make massive profits from their positions.

In sharp contrast with today’s market, during the 1980s and 1990s, the price of oil was cheap and supply levels around the world were high. As a result, the GCC states had invested little in oil exploration production capacity, and were making a relatively small amount of money from the industry. Also during this time, OPEC, (the Organisation of the Petroleum Exporting Countries) had limited control over the markets, its power diluted by the abundance of oil producers around the world.

“OPEC was in a complete state of disarray,” says Samuel Ciszuk, Middle East energy analyst from IHS Global Insight. “Plenty of supply worldwide made it hard for OPEC to establish itself or play any kind of dominating role. Also, everybody except Saudi Arabia was cheating on their quotas. Saudi Arabia was producing a record low, while other
countries were spewing out oil onto the market to make as much money as possible.”Ciszuk adds that many of these countries actually suffered economically during these years, struggling to cope in a market of high supply, but limited demand.

With the turn of the century, the GCC was still investing little in its production capacity, but Saudi Arabia made some attempt to bring OPEC together. At the same time, demand for oil in Asia and the Far East began to grow, and oil prices suddenly started to look up after bottoming out at around $10 a barrel.

“The trend of oil prices was broken in 1998-1999,” says Ciszuk. “Also, OPEC made a point of talking and saying let’s come together and stick to quotas. At this time, demand and supply was also starting to come closer together.”

After the events of September 11, 2001, nerves were rattling, attitudes were changing and industries were feeling the effect. Initially in the energy industry, Ciszuk says a fall in the newly high oil price (although it was still nowhere near as high as today) was felt in the form of a recession, triggered in the US by 9/11 itself, after which the Dow Jones Industrial Average index suffered its worst one-day point loss and biggest one-week losses in history.

But the real impact on the energy industry didn’t occur until the invasion of Iraq. The controversial conflict, led by the US under the administration of president George W Bush and under Britain's prime minister, Tony Blair, was supposedly to locate weapons of mass destruction, and to destroy any Al Qaida networks that might have been operating in the country.

Once the war started, analysts say the shift that had been on the cards in the energy industry for some years became very apparent. “Iraq was taken offstream by the war, so you had a production capacity of 2.5-2.8 million barrels per day disappearing," says Ciszuk. "It was quite evident that while Saudi Arabia and others were sitting on oil, they hadn’t developed their production and so we very quickly ran out of spare capacity. From 2003 onwards, supply and demand became very tight, which was when Saudi Arabia finally started to invest in its own capacity.” He adds that although Iraq wasn’t the only major shut-in, the sudden capacity reduction on its own was enough to scare the markets. “Though it would be hard to say the Iraq War caused [the change], it didn’t, but it was one of the key geo-political turning points. Suddenly when Iraq went offstream everybody realised that the market was tight. And although the trend was already pointing upwards, this was when it really took off.”

And, he adds, although Iraq came back on stream pretty quickly, years of violence and turbulence meant its recovery was slow, and it wasn’t until last year that the country finally reached its original production capacity, at least in any sustainable way.

Of course, after a decade of crash development, the Gulf countries are now well equipped to produce oil, and the industry has never been more profitable. The effects can be seen in the price of the commodity, which reached record highs this year, remaining around the $100-a-barrel-mark. Though nobody can say 9/11 was directly responsible for this, analysts maintain that such an important event was crucial to the development of future events.

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